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Yelp: Advertise or Else?

The site faces a lawsuit—and a barrage of criticism—for mingling ads and reviews

Getting Yelped. That's the term angry business owners have started using when they feel unfairly criticized on the popular review site. Now Yelp is being forced to deal with its own unanticipated criticism. In a federal lawsuit filed in California on behalf of Long Beach's Cats & Dogs Animal Hospital, attorney Jared Beck claims that Yelp routinely highlights negative customer reviews unless business owners agree to advertise with the company. Beck, a Harvard-trained trial lawyer in Miami, says dozens of businesses have contacted him with similar allegations, and he plans to file an amended complaint with more companies in the coming weeks. "This is not an isolated incident," says Beck. "This seems to be a companywide practice."

Yelp co-founder Jeremy Stoppelman was dismissive of Beck's case in a blog post—"Lady Justice needs a lawsuit filter," he wrote. In his first extended interview on the issue, Stoppelman rejects the allegations and compares the suit to the criticism Google (GOOG) and eBay (EBAY) faced during their early years, when people were suspicious of ranking systems they didn't understand. "New technologies and business models can be confusing, and inevitably you have conspiracy theories," says Stoppelman, 32. "You have to take your blows."

Yelp's revenue comes from restaurants, hotels, and other businesses that typically pay $300 a month to advertise on the site, which 25 million people visit each month, according to research service Compete. It's a promising model—Elevation Partners agreed in January to invest as much as $100 million in the company—but because the subjects of Yelp's content (local businesses) are also its primary source of advertising, the potential for conflict is significant. "I'm not going to give Yelp any money," says Marianna Burmenko, the owner of Mara's Salon in San Francisco, who says the company is essentially asking for "bribes." Barry Hyde, who owns M&M Auto Werkes in Campbell, Calif., claims Yelp has repeatedly taken down positive reviews of his business because he refused to advertise. He's considering joining Beck's suit. "Let's put it this way: I run an ethical business," says Hyde, "and they don't." Stoppelman says Yelp never manipulates reviews to favor advertisers.

Yelp has given companies the ability to respond publicly to critics on its site and provides tutorials to educate companies that may doubt the integrity of its rankings. Stoppelman says the company has also held meetings in five cities with more than 100 businesses and, over the next 90 days, executives will meet with groups such as the National Restaurant Assn.

Many analysts say it would help if the talk resulted in greater clarity. Currently, a restaurant owner can pay to have his favorite review appear at the top of a list of reviews, with only light shading and a small "sponsored result" label to differentiate it. Yelp may have to shift such advertising to one side of its Web pages to clearly delineate it from general reviews, says Danny Sullivan, editor of the Web site Search Engine Land. He also thinks Yelp should go further and let businesses opt out of having reviews altogether, an idea Stoppelman rejects out of hand.

Beyond the fate of Yelp, Beck's suit and the surrounding debate may help set new standards for reviews on the Internet. Joe Alexander, general manager of mattress maker Keesta International in San Francisco, calls Yelp "a phenomenal marketing tool for us," but says it has a "Wild West" atmosphere where many businesses try to manipulate reviews to their advantage. Stoppelman has to show he can lay down the law—or risk his company's future.

Burrows is a senior writer for Bloomberg Businessweek, based in San Francisco.
Galante is a reporter for Bloomberg News in San Francisco.